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The Tesla Competition

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August 12, 2013 – Comments (18) | RELATED TICKERS: TSLA

Board: SAS: Tesla Motors

Author: Smorgasbord1

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(Wow, this turned out a lot longer than I thought. Hope it's useful to somebody, though...)

EV competition
My guestimation is that everyone else is a half a decade behind.

There is only 1 other EV generally available in the US right now: Nissan's now well-priced Leaf, an upright hatchback that seats 5, takes 10 seconds to go 0-60, and has an EPA range of about 75 miles. Nissan's CEO, Carlos Ghosen, as made a lot of hay about Nissan being really serious about EVs (and gaining a significant role in the movie, Revenge of the Electric Car in the process), but after seeing the Model S and its glowing reviews Nissan decided to "delay" their luxury Infiniti LE car for a few more years (http://online.wsj.com/article/SB1000142412788732339450457860...).

Audi has cancelled their "eTron" program. (http://www.edmunds.com/car-news/audi-r8-e-tron-wont-make-it-...).

BMW has announced their first generally available EV (the MiniEV and ActiveE were leased test vehicles) won't ship in the US for another 9-10 months. It's a 90 EPA mile (that's a prediction based on what information they've released) small SUV/crossover that seats 4 and takes more than 7 seconds to go 0-60.

The other EVs are so-called "Compliance Cars," which means they're only available in CA, and perhaps a few of the other 10 states that have similar laws requiring automakers to make and sell a certain number of electric cars. Here are some of the "compliance cars" available today: Chevy Spark EV, Honda Fit EV, Ford Focus Electric, Fiat 500e, and Toyota's Rav4EV. The Toyota has a Tesla designed and manufactured powertrain (battery, motor, cooling, etc.).

The companies that don't sell enough vehicles ot meet the law's requirements have to pay penalties, but Tesla is able to sell the "ZEV credits" they get from making EVs - so the other car companies get to pay less than the penalty. The good news for us TSLA investors is that Tesla gets this money instead of the state AND the law kicks in to a higher gear in 2015. But, while EVERY other EV on the planet was designed with the thinking that people are willing to give up convenience and money in order to be "green," Tesla provides better performance, luxury, and convenience at the same price levels and "just happens to be green."

The other car companies just don't get this. In 2009, Audi's US President, Johan de Nysschen, said "[Pure EVs are] for the intellectual elite who want to show what enlightened souls they are." He also called Chevy Volt buyers "idiots." (http://www.dailytech.com/Audi+US+President+Calls+Volt+Buyers...)


Non-EV competition
Because of the EVs they had seen, many people did not expect Tesla could be competitive with ICE (Internal Combustion Engine) manufacturers. After all, BMW, Mercedes, Lexus, Audi, Porsche, etc. have been perfecting the ICE car for several decades, right? There was no way a brash start-up in Silicon Valley of all places could compete using brand new technology (so far delivered only on a 2500 limited production run in a small sports car), right? Making a great car is hard. There's no way a bunch of nerds can do it, and certainly not in volume their first time out the gate, right?

Here's an example of auto industry insider thinking at the time (From Automotive News, a trade journal), titled "Kilowatt? In carspeak, it's kill-a-thrill" (http://www.autonews.com/article/20100719/RETAIL03/307199978#... )
An electric car is mainly an appliance. First, of course, it runs on electricity, the same power that operates dishwashers, hair dryers and bedside clocks. And electricity is not sexy. ... Startup Tesla Motors Inc. is selling electric sports cars. ... But the appeal of most electrics and hybrids is not fun but efficiency.

Oops.

Even when the car came out and started getting rave reviews, insiders didn't recognize the threat. Bob Lutz, former Vice Chairman of GM, wrote a piece in Forbes just over a year ago, titled "Tesla Beating Detroit? That's Just Nonsense" (http://www.forbes.com/sites/boblutz/2012/07/13/tesla-beating...) that ended with "Don’t confuse it [Tesla] with what Detroit does for a living."

That Tesla's Model S is a great car (not just a great EV) surprised the stalwarts of the automotive industry. They were figuring out how to sell just enough EVs to not get penalized (monetarily and publicity wise), not how to make a better car. This mind-set is typical for established companies when faced with disruptive technology. Go read about this history repeating pattern in Clayton Christensen's book The Innovator' Dilemma (http://www.amazon.com/The-Innovators-Dilemma-Revolutionary-B...)

While everyone else was focused entirely on the ecological benefits of electric drive, Tesla focused on the ability electric drive gave them to make a better car. Gut-wrenching acceleration (Tesla's are faster 0-60 than Disney's California Screamin' roller coaster). No gear shifts. Quieter. More room in the cabin. Lower COG. Less required maintenance. Lower per mile costs. Convenience of starting every day with a full tank. Tesla wrapped all that up in standard looking luxury bodywork and priced it about the same as their ICE competition.

A year into production and Tesla can't make them fast enough to satisfy demand. And, this is with zero advertising, zero price negotiations, etc. Heck, while other companies are cutting the prices of their EVs in order to sell more, Tesla has actually raised their prices a few times. Motor Trend, Consumer Reports, etc. have all raved about the car. Anyone looking to buy a big BMW, Mercedes, or Audi sedan is checking out the Model S, and many are choosing the Model S.

Tesla is continuously improving the car. From expected features like park distance sensors to new interior options, to a new upgraded suspension option, Tesla doesn't wait for "model year" changes to roll out improvements. Each one of these things breaks down a barrier someone had for buying the car.

But, Tesla also thinks outside the box. For instance, while other car companies point to a lack of EV infrastructure as an excuse to explain why their EVs aren't successful, Tesla decided to fix the problem by building their own DC fast charging network across the world.


Non-technological Innovation

This is the real kicker for me. While everyone focuses on Tesla's great technology - and it is great - Tesla innovates with more than just technology.

With its Apple-esque boutique stores placed in high traffic shopping malls, encouragement to touch and sit in the cars, product specialists that aren't paid on commission, and giant touch screens for more information (or to actually order), Tesla has changed how people buy cars - and they love it. A no-pressure, upfront and no haggle pricing model.

Saturn tried something like this, but Tesla has taken it to a whole new level. If you're in a Tesla store, note how diverse the Product Specialists are in terms of gender, age, etc. (OK, they're mostly young, but compare the diversity in a Tesla store to any dealership) Watch how people in the store choose to whom they walk up to with questions. I think there's a carefully crafted appeal factor built into their hiring. Also, it's all super low pressure. Is that BMW M5 unlocked for me to sit in? Not in the dealership I visited not too long ago. OTOH, can my kids climb over the back seat of that Model S or crawl into the frunk? Certainly, even with chocolate ice cream on their hands. Heck, the Tesla sales people will take a photo of you in the car with your cell phone if you ask (and many do).

The service model for Tesla is also innovative. Again, instead of figuring out how to shoe-horn the servicing of electric cars into some traditional service model, Tesla found advantages to servicing electric vehicles. With greatly reduced fluids and no engine or transmission, Tesla saw that they could service cars anywhere they could drive a van to. The electric motor is about the size of a watermelon, so easy to have a spare on the van. Try that with a big block Chevy V8! The PEM is about the same size, and everything else on the car runs on electricity (power steering, air conditioning, etc.), so most things are just remove and replace on site. Then refurbish the cores in the factory to original specs for use in other cars.

I mentioned the SuperChargers before. While a great technological achievement to get a half charge in about 20 minutes, the real achievement in my view is the cost model. Using the same inverters built into the cars themselves (your Model S has 1 or 2 of them for 10kW or 20kW AC charging), Tesla takes 12 of those exact same inverters and gangs them up to produce a 120kW Super Charger that pipes DC directly into the battery. Since these inverters are mass-produced (tens of thousands a year), they're less costly than other DC fast chargers like Chademo. Then, pack some solar panels on the roofs to get some free electricity (which they can sell back to the utilities like a homeowner with solar panels does if usage is less). All very cool.

But, then Tesla does the extraordinary step of making use of these SuperChargers free for all Model S owners. I pointed out earlier how the entrenched mindset of the established automotive companies meant they would never even think of trying to solve the EV infrastructure problem. Tesla not only solves it with technological innovation, they solve it with business innovation. Imagine your car getting free long distance fuel forever. Again, Tesla looked at how the benefits of electric drive - in this case ecologically friendly and economically cheaper - could be used to improve the value of its products to their customers.

I love that Tesla's have free fueling options, but you gotta admire how Tesla handled their recent capital raise. In my view, they clearly planned to blow out expectations back in Q1, get a short squeeze (remember Musks "Tsunami of hurt" tweet?), and then issue $600 million in convertible notes (base of under $125 per share which is a great price today) plus stock to raise over $900 million, then pay off the DOE loans in full (first US automaker to do so). Note that more than just the great press (and Fox news silencing) from paying the loans off, the move extinguished millions of stock warrant contracts that the government carried at much lower exercise prices. This is financing innovation at its finest - a shareholder friendly move. (http://www.forbes.com/sites/thestreet/2013/07/09/tesla-jumps...)


Conclusion on Competition

Bottom line for me, Musk was right to laugh. It might seem like hubris to some, but considering all of the above, Tesla has earned the right to chuckle a bit. While some insist that BMW or Mercedes or maybe even Ford will wake up and use their vast resources to put Tesla out of business, I don't see that happening. Even if the people at those companies get it, the corporate structure they have - and which has made them successful - won't let them do what is necessary.

The high tech company I was previously at got bought out by a ginormous high tech company. It was fine for a while, but it was clear to me and even some execs that we weren't innovating enough. The VP of engineering had recently done a presentation where he put up company names like Kodak, RIMM (Blackberry), Nokia, etc. and talked about the danger of disruptive technologies to our company. I had just accepted an offer from a pretty small company, and he wanted to talk me out of it. He knew all about the Innovator's Dilemma, technology disruption, etc. I asked him how our company could be like Nikon instead of Polaroid. Polaroid, after all, had a bunch of digital cameras and other related products, but they failed because the new business model required didn't match their razor and blades model - it wasn't the technology disruption that killed Polaroid, it was the business model disruption that killed Polaroid. We talked and while it was clear to me that he totally "got it," it was also clear to me that he was mostly powerless to make the necessary changes in this ginormous company to successfully make the transition. I left for my new job a couple weeks later.

This is important. For all the great engineering BMW has, for instance, they first don't have the will. Successful companies have anti-bodies that keep them successful. Those anti-bodies kill off ideas that don't make their current business better. They listen to their current customers who want better MPGs or brighter color interiors or a larger sunroof. But, customers aren't demanding a change in propulsion technology. As you have certainly read, many people were vehemently opposed to such a change. A company of BMW's size, even if they could engineer and produce hundreds of thousands EVs, couldn't sell hundreds of thousands of EVs. But, a small company like Tesla can make money at tens of thousands of vehicles, and use that experience to work towards their hundred thousand a year product a few years down the road.

What's a BMW to do? When the shift comes, it'll come quicker than they can turn around their aircraft carrier of a company. Back in the day, disk drive companies actually set up completely separate entities to produce the next generation of disk drives, and one even swapped the whole staff when the new tech was ready. Even if BMW has the foresight, the infrastructure changes needed to do this are too massive, the investment needed too great, and even if they did that they'd lose the focus they need on their current cars to keep them great. Current shareholders would whine and sell off if BMW invested what they really need to invest in order to lead the EV future. Same at Ford, Toyota, etc.

But, even before they could do that, they'd have to think they needed to do that. They'd have to realize that the change is coming, and like Nokia making fun colors or round keypad phones instead of smarter phones, by the time they realize the new world is here, they'll be completely unprepared.

Since this post is already way too long, I'll make it longer. Reed Hastings of Netflix gets The Innovator's Dilemma. He used to be one of my heroes. Netflix turned the movie rental business on its head - twice. First was a business thing with the DVD mailer, second was the streaming business as subscription, not per show. Both completely disruptive ideas that put the established companies out of business. But, then he blew it. Perhaps he was too focused on the upcoming change and simply moved too quickly, but the bottom line for me is that he didn't "get" his customers. Netflix doesn't understand that customers don't want to choose streaming or DVD and then choose a movie, they want to choose what movie they want to watch and then deal with whatever format it's available. Separating the businesses, removing the "add to DVD queue" button, etc., was a customer unfriendly move. I feel that Netflix doesn't care about me, just their business. It's maybe the first case where someone moved too quickly on The Innovator's Dilemma instead of not quickly enough. Ironic, eh?

On the other hand, I feel Musk and Tesla care not only about their customers, but about their impact on the world. They could have done the SuperCharger things solely as a competitive advantage against other EVs, or to level the road trip comparisons with ICE cars, but they took it further, finding a way to make it cost effective to give the electricity away for free. They thought about value to their customers in ways Netflix doesn't.


Epilogue

Tesla obviously needs to keep the pedal to the metal in order to be successful. They've overcome serious hurdles and big odds and have barely made a mis-step. The stock is at all time highs, and has a nose-bleed valuation. It's really hard to recommend that anyone buy at these levels. And while Tesla has serious and hard challenges in front of it, the overall future is no longer in doubt to me. Electric cars are coming and soon they're going to be better than what you drive today. Maybe you believe that, maybe you don't. And even if you do, and even if you believe Tesla will continue to lead that charge (pun intended), maybe you think the stock has gotten ahead of itself. Way ahead of itself, even. I won't argue with that.

But, the point of this post is that for the foreseeable future, Tesla has no competition to speak of. No-one else is going to go after Model S or Model X - too late for that. For there to be real competition for Tesla a whole bunch of unlikely things have to happen:
1) The board of directors of these auto companies have to believe, really believe, that if they stay on their current track of just dabbling in EVs until the market is ready, that they will be the next Kodak or Nokia.
2) The board has to have a management team in place that also are true believers and grant them the power within the company to make the commitment of money and people necessary to beat Tesla's Gen-II in 3-4 years. They have enough time, after all.
3) The management team has to convince its employees that transition is good for the company. This means everyone from product designers to marketing to sales to service to engineering, etc. Remember, it's going to be asking their middle mangers with decades of experience with ICEs to do lead something different. They'll have to get new talent that understands the new technologies and can implement them at Tesla's level.
4) The board and management team have to have the fortitude to stand up to shareholder complaints about smaller profits and perhaps a weaker current product line.

Now, do you really think they can do that? What was the last company to successfully accomplish that? My experience tells me that history will repeat itself, and the new upstart will win. 

18 Comments – Post Your Own

#1) On August 12, 2013 at 1:27 PM, tangoev (97.33) wrote:

Great post. You have nailed the Tesla difference. They are changing the industry and the product is absolutely first class.

 BMW are taking the EV more seriously that Detroit. The recent launch of the i3 is interesting. Very much a city car, but an impressive start and a sports i8 to follow soon.

I attended the London event and wrote a short review here.  http://evinfo.co.uk/bmw-i3-launch-event/

 tango 

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#2) On August 12, 2013 at 3:19 PM, dvena (66.91) wrote:

Really, really fine post. - Danny

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#3) On August 12, 2013 at 5:13 PM, EnigmaDude (77.07) wrote:

Next step in the plan - Elon Musk buys Detroit!

Great post!

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#4) On August 12, 2013 at 8:00 PM, AceInMySleeve (< 20) wrote:

First of all the editor for this comment board is garbage. 

I didn't finish the article (that's not a comment on quality just my time), however I did not see the proper framing.

The Tesla S is a 80k$ vehicle. In that bracket they do well. There is a huge sleight of hand to compare vehicles across major price brackets (i.e. Leaf and most of the others are not targetting 80k$).

I find it a perfectly acceptable business strategy to start at the top and descend along with the declines in battery prices. However, TSLA is priced to dominate now much more than the 80k$+ bracket and it remains to be seen that they can.

 In other words, investors need to predict the future accurately. My prediction is that Tesla will face the same problems everyone else does when they try to sell lower priced vehicles. 

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#5) On August 12, 2013 at 8:10 PM, JulianCox (< 20) wrote:

Excellent. I honestly think it is possible to take it one step further and take a look at the valuation model also. 

The value of this business can also be expected to conform to a tech adoption curve. An adjunct to the Innovator's Dilemma. 

Tesla is Innovative (disruptive if you like) on two levels, not just in terms of technology, but also in terms of the business model applicable to financing and sales. It is the only mass production car manufacturer with a cash flow positive sales model. This is huge.

"[Pure EVs are] for the intellectual elite who want to show what enlightened souls they are." 

This is precisely true of the wrong idea about EVs. All of the other EVs including the Nissan Leaf fall into this category, and cannot be expected to break into mass adoption (or even early adoption). Hence price-cuts below cost to try to move them, same with the Volt.

Tesla has broken into the Innovator and Early Adopter phases of the Tech adoptionn curve and delighted them both to the extreme. Next stop on the curve is Early Mainstream. A sales volume predictably 3400% of the Early Adopter market in accordance with the same theory and pattern of behavior observed of Tesla and the market response it has garnered.

By any other thesis or analogy, yes the price is too high. But by the correct modelling aproach for the actual asset class that this is, then the story is very different. The current price actually undervalues relatively near-trem prospects. In other words (day-tradng on volatility asside) not investing in Tesla now will actually prove to be a regrettable financial error.

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#6) On August 12, 2013 at 8:30 PM, Soflason (< 20) wrote:

Great post, it's so clear/obvious that Tesla is so, so far ahead of the competition.  For more on their lead, check out:

 http://seekingalpha.com/article/1508662-teslas-competitors-are-beginning-to-give-up-the-electric-car-race

http://insideevs.com/tesla-model-s-is-slowly-but-surely-eliminating-potential-future-competitors/

And, BMW i3 vs. Tesla Model S... this article provides the best comparison:

http://www.slate.com/blogs/future_tense/2013/07/29/bmw_i3_review_electric_car_is_a_cheap_ugly_tesla_model_s_with_an_suv_on.html

 

 

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#7) On August 13, 2013 at 12:45 AM, awallejr (78.92) wrote:

Guys I am sorry.  I do A LOT of driving.  Gasoline powered still owns for me.  Takes 5 minutes to refill and I am off for 100s and 100s of miles.  Until they make a true solar car where I never need to stop and recharge this is all just gimmicks. 

I wish Tesla luck, but it is still niche to me.

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#8) On August 13, 2013 at 11:54 AM, DavidAnglin (< 20) wrote:

Brilliant post... I wish I'd written that! 

Sincerely, jan  :^)

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#9) On August 13, 2013 at 2:17 PM, PainterPoker (22.63) wrote:

Awallejr, it sounds like your job requires an abnormal amount of driving. Most people don't fit that profile. To say a high performance electric vehicle is a gimmick is ridiculous. If miles driven between fuel ups is the only downside, then Tesla is sure to destroy the competion. 

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#10) On August 13, 2013 at 2:44 PM, chinesebuffett (< 20) wrote:

Cash flow positive sales model, yet cash flow still negative for operations?

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#11) On August 13, 2013 at 5:04 PM, awallejr (78.92) wrote:

Except Painter the car still remains niche since most really couldn't afford it just to use as a commuting vehicle.  And those needing a long distance vehicle couldn't use it either.

Until these cars increase range dramatically with quick recharges, gasoline powered cars, or hybrids, I submit will still be preferred.  I hope we eventually obtain such technology. 

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#12) On August 18, 2013 at 9:11 PM, nubzster70 (< 20) wrote:

I disagree that the Model S is a 'niche' and that it is 'outside of the mainstream'.  With the less moving parts, less maintainence and such, the Tesla is actually a vehicle that lasts a lot longer than a standard ICE vehicle and therefore be allowed to be financed for a longer period of time than the standard 5-7 year loan, maybe ten to 15 years. This would lower the car's monthly payment enough to become more acceptable in most family budgets. Once the banking industry realizes this and implements loans reflecting this fact, sales will accelerate even more.

 

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#13) On August 21, 2013 at 2:42 PM, mowensmd (< 20) wrote:

I continue to find it fascinating to see comments from so many random people professing what they feel they need (ICE type range) vs. the reality based on so much data (<40mi/day >90-98% of driving).  It's like people don't actually know what they need.  

 But that is classic.  Happened to film too, "digital isn't as good as film" arguments followed the expected timeline of incremental improvements to the original disruptive technology (universally true) silenced the argument.

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#14) On August 21, 2013 at 3:28 PM, awallejr (78.92) wrote:

I know exactly what I need.  I need a car that I can drive without worrying if I can get a recharge, that I can find a recharge station with ease, and I need a recharge that will take about 5 minutes.  And no I don't want a 10-15 year car loan.

I think the Tesla S is a sweet looking car, but it is still niche at the moment.  How many are expected to be made this year?  25,000-30,000? Compared to 15 million other types of cars.  Sorry, niche.

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#15) On August 23, 2013 at 2:37 AM, Smorgasbord1 (< 20) wrote:

What you say you need today is based on what you know today.

It wasn't that long ago when people knew what they needed from a cell phone. They needed a keypad. They needed secure email. They needed 3G connectivity. In 2007 Apple came out with the iPhone, which had none of those. It didn't even get 0.5% of the cell phone market, and it was priced well above the competition. RIM called it a toy, and Nokia kept pushing fashion phones. Heck, even by 2010, Apple had barely 4% of the cell phone market. It was called "niche" back in 2008, but the writing was already on the wall.

Today, people need internet browsers, productivity and all sorts of other apps that let them customize what they use their phone for. And who buys low end digital cameras or camcorders anymore now that their phones have 8 Megapixel cameras and shoot HD video? Companies that used to concentrate on web sites and SEOs for business now concentrate on apps and mobile social media presences. It wasn't that long ago that patients in doctors' waiting rooms were reading magazines. Today the magazines gather dust because everyone is on their phones and tablets in those same waiting rooms.

Tesla is a classic disruption story in the making, both on technology and business model fronts. The competition is asleep, and even if Tesla's early success has awoken them, they don't have the guts and determination to do what it'll really take to participate in the future of the automobile.

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#16) On August 23, 2013 at 6:23 PM, awallejr (78.92) wrote:

I don't know why people keep questioning on what I need.  My needs are very specific as set forth in #14.  The additional proviso would be affordability.

Comparing Tesla as being a classic disruptive story akin to the Iphone is silly.  The Iphone gave everyone the ability to have the internet in the palm of their hands along with telephonic capabilities.  And once AT&T decided to subsidize it, the product took off.

What comparable impact does owning a Tesla have over the Volt, Prius, Fusion and the gas powered cars?   Anyone reading this own one?  If so how much does it cost you to recharge the battery?  Nice if you save $200 a month on gas but your Con Ed bill is now $300 higher.  How long does it take to recharge?  Nice to be able to not have to always plan your trips around recharge time.

This is nowhere near disruptive.  What would be disruptive is making a true solar powered car that is affordable and never needs downtime to recharge.

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#17) On September 01, 2013 at 12:14 PM, Smorgasbord1 (< 20) wrote:

@awallejr, you should do some research on Tesla and EVs. Electricity as a fuel is almost an order of magnitude cheaper than gas. I replaced a ~$250 gas bill for about a $30 increase in electricity. Recharge times don't matter for day to day use since my car is fully charged by morning. I start everyday with a full tank of electrons. Even for road trips, my bodily needs involve stopping every few hours, so a 30 minute SuperCharger refill wouldn't affect my plans noticeably.

The comparison to the iphone was to not to equate disrutiveness, but to show that disputions involve changes to existing behaviors. This is the way of all disruptions - the new thing has pros and cons, but people adapt when the advantage of the pros outweighs the cons. Then, as the technology improves, the cons continue to shrink and then there's no going back. The new thing doesn't have to be better than the old in every way in order to be wildly successful. With the iphone, we lost physical buttons and we lost the ability to have a really small phone, for instance. 

 

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#18) On September 01, 2013 at 3:58 PM, awallejr (78.92) wrote:

Yeah well that works for you and I wish you luck.  Hybrids would do the same with the added "protection" of back-up gasoline.  But since I use my car for work and not for short duration commuting it doesn't help me.

In a couple years we shall see.  Aside from being pretty I still think the hybrids are better and more affordable.

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